Posts Tagged ‘austerity’

As a deficit reduction and economic policy, austerity never made any sense. It’s ridiculous to think that by cutting budgets in a time of economic recession, you can shrink budget deficits in the future, ultimately increasing economic growth. The policy defied common sense; unfortunately, the powers-that-be fully embraced it, to the misery of countless millions in Europe and here in the U.S. I’ve written about it previously, in a post two years ago entitled Austerity = Suffering and last year, Greece brutalized by more austerity.

Despite the evidence, these powers-that-be have continued to stubbornly cling to this failed policy, imposing it on more countries (Cyprus anyone?), sharing the misery with countless millions more. And finally, concrete evidence has emerged that points out serious flaws in the economic research that underpinned austerity, driving what one hopes is a final stake in the heart of this nonsensical and destructive policy.

As pointed out yesterday in the Roosevelt Institute’s blog The Next New Deal by Mike Konczal, known as @Rortybomb on Twitter, original austerity research basically twisted the facts using selective data and unconventional weightings to reach a flawed conclusion. Rather than forcing economic growth downward, higher budget deficits (for countries carrying a debt-to-GDP ratio of more than 90 percent) produce an average 2.2 percent GDP rate not the .1 percent cited in the original research.

As Konczal notes, “The debt needs to be thought of as a response to the contingent circumstances we find ourselves in, mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are.” Exactly! When an economy is on it’s knees, stimulus spending, even when it creates significantly higher deficits, is needed to bring it to it’s feet again. Then, once the economy has recovered, deficit reduction efforts, can, and should resume. And when they do, they will be more productive and effective, because they will be in the context of a healthy economy, which will contribute the efforts. See the Clinton years.

By depriving an economy of stimulus during hard economic times, it is doomed to exist in a sub-basement of economic recession, if not depression (see Ireland, for example) that will actually increase deficits. The austerity mindset reacts to these higher deficits with even more austerity, creating a vicious cycle which makes it incredibly difficult for an economy to gain any positive traction and causing untold suffering to millions who lose their jobs and are forced to live on the margins.

Beyond the substantiative problems of this research, Matt O’Brien, aka Obsolete Dogma on Twitter, in an article “The Great Debt Delusion: How Math Keeps Proving Austerity Wrong” notes that what is equally astonishing is how such a “shoddy” piece of research gained such a following in public policy and political circles. It’s depressing that so much misery has been inflicted on so many people based on a misguided, flimsy policy.

The question is whether these revelations will actually do anything to dissuade those who pursue them with so much vigor. I’m guessing not, which means it is the responsibility of the electorate here and in Europe to show them the door.

I’m a bit late to the party on this, but here goes: last week the St. Louis Fed released its U.S. Recession Probabilities chart, which shows the risk of a U.S. recession near zero. I’ve been following the progress of the U.S. economy pretty closely for the past couple years as it has struggled to emerge from the Great Recession and gain a more steady footing, so I’m finding this assessment interesting.

While I believe that the risk of recession is less than it has been in the past few years, I wouldn’t say that it is near zero. Although the recovery does seem to be gaining more traction, that’s happened before. The last couple of Springs, the economy will seem to firm up on a couple of different fronts, whether that’s housing, consumer spending, business investment, industrial production or whatever, only to fallback later in the year because of external or internal issues.

Last year the political uncertainty surrounding the election and the Fiscal Cliff slowed the economy down in the second half, the year before — and the year before that — Europe was the focus of economic fears along with the continuing housing crisis. This year, we’re into Sequestration and the debt ceiling battle is coming up.

Risks from Europe seem to be on the back burner and less fraught than they used to be, but the fact is that nothing fundamental has changed about the European situation except that the European Central Bank is printing a lot of money. Austerity is taking a huge tool, unemployment is sky high and EU leaders are no closer to solving the region’s problems than they were a few years ago.

Anyone of these risks, or a combination of them or other risks that we are unaware of at this time could push the economy into recession. There are a number of positive developments that could continue to keep the economy on a growth track, including the recovering housing market and the brightened employment picture — I’m hopeful because I want a growing economy and it’s benefits just as much as the next person.

Re big picture risk, whether the risks of a recession are low or high, I do believe that we eventually will experience another financial crisis. I actually had an argument on Twitter the other day based on expressing the opinion that another global financial crisis is all but inevitable.

I base that belief on the fact that the fundamental problems in the global economy that lead to the Great Recession haven’t been solved in any meaningful way and that the systems that we have are so complex and interact in so many unforeseen ways that it is a matter of when, not if, another crisis occurs. It could be next month, next year or in five years. I have no idea.

But if you look at economic cycles and the recent history of boom and busts, it is evident that these crises occur periodically and that they are happening more frequently. I would love to be wrong, because the havoc they create causes so much suffering. We’ll just have to wait and see.

Now that the election is over, the ongoing crisis in Europe is back front and center — if it isn’t on your radar, it should be. That’s because all the “solutions” so far have merely kicked the can down the road a bit farther. Meanwhile, as politicians negotiate, meet and talk, actual people are suffering. More.

Nowhere is this more evident than in Greece, which is about to be further brutalized by more austerity as the government just passed another multi-billion austerity package to keep the Euro’s leaders sweet. The bailout funds will keep rolling in, but at a steep price. If nothing else tells the story of the toll austerity is taking, this horrible photo of a riot police officer engulfed in flames should.

Protestors rioted in vain against this latest round of austerity, which looks to be the worst yet. More spending cuts will weaken the already frayed social safety net as tax increases will hit the poorest the hardest and labor reforms will allow further exploitation of workers. All this is happening with a backdrop of Greece entering its sixth year in a row of economic contraction with more than 25 percent of its population out of work.

The leader of the radical left main opposition Syriza party blasted the government for “leading the Greek people to catastrophe and chaos.” The government clung to the fact that these cuts will keep Greece in the Euro, which they believe is better than the alternative. Better for whom? The political and economic elite, no doubt, but not the unemployed, poor and disenfranchised, who make up an increasingly large share of the Greek populace.

I don’t see any good outcome for all of this. All the bailouts are doing is bailing out European banks, who could go under, bringing the entire financial system down with them a la Lehman Brothers. While I certainly don’t relish the idea of another global financial crisis, I really wonder if any kind of meaningful change is possible without one. The grip that the banks have on the political and economic leaders of the West is truly a stranglehold one, and I’m not sure what it would take to break it.

No regulatory reforms have succeeded in denting that power and it doesn’t look like the West has the political will to break the too big to fail banks and make the changes in the system necessary to restore some balance of power between the haves and the have-nots. No wishful thinking in the form of the granting of the Nobel Peace Prize to the Leaders of the Euro Zone or the G-7 leaders monitoring the crisis will have much of an impact. So, onward we go, with some type of economic crisis or catastrophe all but inevitable.